Record Capital Flight
Money was leaving the country at a record clip earlier this year through unauthorized channels, according to analysts. That’s bad news for China, which needs to keep financial reserves high to maintain confidence in its markets.
The State Administration of Foreign Exchange, a key government regulator, said Sunday that its most important job next year is to prevent major financial risks, avoid “abnormal” capital flows across its borders and crack down on illegal trading activities.
“We need to fight a critical battle” to defuse financial risks and maintain market stability, SAFE said in an statement. The pledge was an unusually strong one for the agency, which deployed the kind of military language more often used by top leaders in China.
- The agency has already started cracking down on capital flight. In November, it fined Chinabank Payments $4.2 million — one of the largest-ever fines SAFE has imposed — for moving money overseas.
- Major corporations aren’t the only ones linked to the flight of money out of China. Earlier this month, a Bank of China (BACHF) customer took out $50,000 in cash from his bank account over the course of a week. SAFE fined the bank nearly $6,000 for breaking a government rule limiting how much foreign currency people can take out of their accounts within a short period of time.
You know it’s serious when a county with a $13+ trillion GDP is overly concerned over $50,000.
Why the Flight?
Investors fear another devaluation. And that’s a reasonable fear. State Owned Enterprises (SOEs) are imploding with unpayable debt.
And anyone with an ounce of common sense knows China’s GDP is grossly overstated.
For discussion, please see How Badly Overstated is Chinese and US GDP?
Despite the fact that pressures on the yuan are negative, and for good reason, on August 5, US Treasury Declares China a Currency Manipulator Under Orders From Trump.
What a hoot.
If China floated the yuan and allowed free movement of money, the yuan could easily crash.
This brings us to the “Impossible Trinity”
The problem with capital outflows lies in the so-called “impossible trinity”: a country with open capital markets can choose to have a fixed exchange rate or independent monetary policy, but not both. Although China’s soaring debt requires monetary…t.co/6BxgCxmqw7
— Michael Pettis (@michaelxpettis) December 20, 2019
“The problem with capital outflows lies in the so-called impossible trinity: a country with open capital markets can choose to have a fixed exchange rate or independent monetary policy, but not both.”
“As debt continues to rise, these inconsistencies become more extreme, so what can Beijing do? It turns out that the only way to maintain the exchange rate while increasing control of domestic monetary policy is to increase capital controls.”
Trinity Plus – Quadrality
China wants to do at least four things at once.
China has artificial GDP goals to meet. The more it tries to meet those goals, the more bad debt it will create.
Thus, it’s is not even a “Trinity”.
And the more bad debt China creates, the more capital flight pressure rises.
Quadrality and Beyond
China wants a stronger Yuan, more debt, 6% GDP, corporate writeoffs, lower interest rates, less support for GSEs, and capital controls.
Did I leave anything out? So, what’s it going to be?
And who has the correct word for all that?
Mike “Mish” Shedlock